Requesting Approval of Your Unfunded, Self-Insured Benefit Plan for Purposes of Service Contract Act Compliance

“Red tape will often get in your way. It’s one of the reasons I often carry scissors!”

– Richard Branson

Many federal contractors are large enough to cut out the middleman and institute what are called self-insured fringe benefit plans that provide Health & Welfare (“H&W”) benefits to their employees. These plans typically are unfunded in the sense that they do not require the contractor to make premium payments to a third-party on behalf of the employees. Instead, the company is able to furnish the benefit to the employee if anything were to happen to them, like the employee needing medical care. These benefits often take forms that look similar to health insurance. They have a name brand third party administrator and a nationally recognized network of medical providers. But inside the plan they are pay-as-you go situations rather than premium based. At the end of the day, the employer is on the hook for each medical claim submitted.

The problem with self-insured plans is that the Department of Labor (“DOL”) looks down on these kinds of arrangements and makes it difficult for contractors to receive credit for their payments towards their Service Contract Act (“SCA”) fringe benefit obligations. This is not necessarily a bad policy choice. A self-insured company may eventually end up not completely solvent, facing bankruptcy, and be unable to process its employees’ benefit claims thus potentially leaving these employees on the hook for thousands of dollars of unreimbursed medical debt.

Accordingly, DOL has decided to regulate these plans if you are a U.S. Government service contractor. To enforce this policy, DOL has stated that the SCA requires the payment of prevailing wages and “bona fide” fringe benefits from “bona fide” fringe benefit plans.  A “bona fide” fringe benefit plan is one that is:

(1) The provisions of a plan, fund, or program adopted by the contractor, or by contract as a result of collective bargaining, must be specified in writing, and must be communicated in writing to the affected employees. Contributions must be made pursuant to the terms of such plan, fund, or program. The plan may be either contractor-financed or a joint contractor-employee contributory plan. For example, employer contributions to Individual Retirement Accounts (IRAs) approved by IRS are permissible. However, any contributions made by employees must be voluntary, and if such contributions are made through payroll deductions, such deductions must be made in accordance with § 4.168. No contribution toward fringe benefits made by the employees themselves, or fringe benefits provided from monies deducted from the employee's wages may be included or used by an employer in satisfying any part of any fringe benefit obligation under the Act.

(2) The primary purpose of the plan must be to provide systematically for the payment of benefits to employees on account of death, disability, advanced age, retirement, illness, medical expenses, hospitalization, supplemental unemployment benefits, and the like.

(3) The plan must contain a definite formula for determining the amount to be contributed by the contractor and a definite formula for determining the benefits for each of the employees participating in the plan.

(4) Except as provided in paragraph (b), the contractor's contributions must be paid irrevocably to a trustee or third person pursuant to an insurance agreement, trust or other funded arrangement. The trustee must assume the usual fiduciary responsibilities imposed upon trustees by applicable law. The trust or fund must be set up in such a way that the contractor will not be able to recapture any of the contributions paid in nor in any way divert the funds to its own use or benefit.

(5) Benefit plans or trusts of the types listed in 26 U.S.C. 401(a) which are disapproved by the Internal Revenue Service as not satisfying the requirements of section 401(a) of the Internal Revenue Code or which do not meet the requirements of the Employee Retirement Income Security Act of 1974, 29 U.S.C. 1001, et seq. and regulations thereunder, are not deemed to be “bona fide” plans for purposes of the Service Contract Act.

(6) It should also be noted that such plans must meet certain other criteria as set forth in § 778.215 of 29 CFR part 778 in order for any contributions to be excluded from computation of the regular rate of pay for overtime purposes under the Fair Labor Standards Act (§§ 4.180-4.182).

29 C.F.R. 4.171. 

For most of these unfunded, self-insured benefit plans, the major issue is paragraph (4) of this provision, which requires that the contractor’s contributions be made irrevocably to a third-party trust or an insurance organization. There is an exception to this, paragraph 4 references paragraph (b) which states:

(1) Unfunded self-insured fringe benefit plans (other than fringe benefits such as vacations and holidays which by their nature are normally unfunded) under which contractors allegedly make “out of pocket” payments to provide benefits as expenses may arise, rather than making irrevocable contributions to a trust or other funded arrangement as required under § 4.171(a)(4), are not normally considered “bona fide” plans or equivalent benefits for purposes of the Act.

(2) A contractor may request approval by the Administrator of an unfunded self-insured plan in order to allow credit for payments under the plan to meet the fringe benefit requirements of the Act. In considering whether such a plan is bona fide, the Administrator will consider such factors as whether it could be reasonably anticipated to provide the prescribed benefits, whether it represents a legally enforceable commitment to provide such benefits, whether it is carried out under a financially responsible program, and whether the plan has been communicated to the employees in writing. The Administrator in his/her discretion may direct that assets be set aside and preserved in an escrow account or that other protections be afforded to meet the plan's future obligation.

29 C.F.R. 4.171(b).

We often recommend that clients make contributions to an irrevocable trust to avoid the issue of unfunded self-insured benefit plans. See our prior blog on the same subject, https://www.awrcounsel.com/blog/2019/10/9/creating-trusts-to-skirt-self-insured-unfunded-fringe-benefit-plans-sca-problems?rq=unfunded. Then that plan would be fully funded, and thus can arguably avoid these regulatory hoops.  However, if you prefer to go the full self-insured unfunded route, DOL has a process of submitting the plan’s information for approval by the Administrator of the Wage and Hour Division.

The process is straightforward -- the plan documents need to be collected and furnished to DOL via an email box at unfunded@dol.gov.  These documents should include the details of the plan as it has been communicated to the employees of the company, what benefits that it will provide, what contributions the employer/employee is making, the commitments that the contractor is making and whether those commitments will be enforceable.

The contractor should also submit a cover letter describing the plan, and why it should satisfy both the elements in 29 C.F.R. 4.171(b), as well as why it is a bona fide fringe benefit plan as described by 29 C.F.R. 4.171(a). As stated above, the plan will be evaluated by the following factors:

whether it could be reasonably anticipated to provide the prescribed benefits, whether it represents a legally enforceable commitment to provide such benefits, whether it is carried out under a financially responsible program, and whether the plan has been communicated to the employees in writing.

29 C.F.R. 4.171(b). If the Administrator is leery of the contractor’s ability to furnish these benefits, then the contractor can be directed to set aside money in an escrow account to back up the contractor’s commitments.

Again, all this information is furnished to unfunded@dol.gov, the designated email address for submission of unfunded benefit plans. From there, DOL will confirm receipt of the request for review and state that DOL will have an analyst reach out if there are questions or if DOL needs additional information. There is no official timeline for DOL to analyze the plan and reply with their decision. However, in our recent experience it took two months to receive a reply approving the plan.

In the approval letter, assuming you are approved, DOL echoes the Code of Federal Regulations requirements for bona fide fringe benefit plans, as well as the requirements for unfunded plans. Then they discuss the particulars of the plan itself. Finally, they state that the contractor is able to take credit for their contributions to the plan towards their fringe benefit obligations under the SCA.

These plans can be limited in their use. Under the SCA, you only receive a credit for benefits that you actually pay. So, for self-insured plans, an employee may never need to access the benefits described under the plan and thus the employer may still arguably be on the hook for the employee’s fringe benefit payments under the applicable “odd numbered" wage determination. Whether this is the case may depend on the plan. However, for some companies that already have self-insured plan for the majority of their non-SCA or exempt employees, it can be easier to self-insure and make up the difference with cash in lieu payments. For these companies, submitting their plan to unfunded@dol.gov can be the best option, and is required by binding regulations if you are a SCA-covered contractor.